Types of Mortgages

1. Conventional Loan – Best for borrowers with a good credit score
2. Jumbo Loan – Best for borrowers with excellent credit looking to purchase a home over $600,000 (In GA)
3. Government-Insured Loan – Best for borrowers who have 580 credit score or better and prefer to have a fixed down-payment 
4. Fixed-Rate Mortgage – Best for borrowers who want the predictability of the same payments throughout the entire loan
5. Adjustable-rate mortgage – Best for borrowers who do not plan to stay in the home for a long time, and are comfortable with the risk of larger payments down the road

1. Conventional Loan

Conventional loans are not backed by the federal government, and they come in two packages: conforming and non-conforming.

• Conforming loans – As the name implies, a conforming loan “conforms” to the set of standards put in place by the Federal Housing Finance Agency (FHFA), which includes credit, debt and loan size. For 2022, the conforming loan limits are $647,200 in most areas and $970,800 in more expensive areas.
• Non-conforming loans – These loans do not meet FHFA standards. They might be for larger homes, or they might be offered to borrowers with subpar credit or who have experienced serious financial catastrophes such as a bankruptcy.

Pros of Conventional Loans

• Can be used for a primary home, second home or investment property
• Overall borrowing costs tend to be lower than other types of mortgages, even if interest rates are slightly higher
• Can ask your lender to cancel private mortgage insurance (PMI) once you’ve reached 20 percent equity, or refinance to remove it
• Can pay as little as 3 percent down on loans backed by Fannie Mae or Freddie Mac
• Sellers can contribute to closing costs

Cons of Conventional Loans

• Minimum FICO score of 620 or higher often required (the same applies for refinancing)
• Higher down payment than some government loans
• Must have a debt-to-income (DTI) ratio of no more than 43 percent (50 percent in some instances)
• Likely need to pay PMI if your down payment is less than 20 percent of the sales price
• Significant documentation required to verify income, assets, down payment and employment

Who Should Get a Conventional Loan?

If you have a strong credit score and can afford to make a sizable down payment, a conventional mortgage is probably your best pick. The 30-year, fixed-rate conventional mortgage is the most popular choice for homebuyers.

2. Jumbo loan

Jumbo mortgages are appropriately named: These loans fall outside FHFA limits. Jumbo loans are more common in higher-cost areas such as Los Angeles, San Francisco, New York City and the state of Hawaii, where home prices may well exceed the conforming loan limits.

Pros of Jumbo Loans

• Can borrow more money to buy a more expensive home
• Interest rates tend to be competitive with other conventional loans

Cons of Jumbo Loans

• Down payment of at least 10 percent to 20 percent needed
• A FICO score of 700 or higher typically required
• Cannot have a DTI ratio above 45 percent
• Must show you have significant assets in cash or savings accounts
• Usually require more in-depth documentation to qualify

Who Should Get a Jumbo Loan?

If you’re looking to finance a sum of money larger than the latest conforming loan limits, a jumbo loan is likely your best route.

3. Government-Insured Loan

The U.S. government isn’t a mortgage lender, but it does play a role in helping more Americans become homeowners. Three government agencies back mortgages: the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans).

• FHA loans – Backed by the FHA, these types of home loans help make homeownership possible for borrowers without a large down payment or pristine credit. Borrowers need a minimum FICO score of 580 to get the FHA maximum of 96.5 percent financing with a 3.5 percent down payment. FHA loans require mortgage insurance premium (MIP), which can increase the overall cost of your mortgage. Lastly, with an FHA loan, the home seller is allowed to contribute to closing costs.
• USDA loans – USDA loans help moderate- to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Some USDA loans do not require a down payment for eligible borrowers with low incomes. There are extra fees, though, including an upfront fee of 1 percent of the loan amount (which can typically be financed with the loan) and an annual fee.
• VA loans – VA loans provide flexible, low-interest mortgages for members of the U.S. military (active duty and veterans) and their families. VA loans do not require a down payment, mortgage insurance or a minimum credit score, and closing costs are generally capped and may be paid by the seller. VA loans charge a funding fee, a percentage of the loan amount, which can be paid upfront at closing or rolled into the cost of the loan along with other closing costs.

Pros of Government-Insured Loans

• It is easier to qualify
• They require lower down payment 
• There are lenient credit requirements
• You can strengthen your finances 

Cons of Government-Insured Loans?

• Extra mortgage insurance and fees
• Size Limits and or restrictions

Who Should Get a Government-Insured Loan?

Government-backed loan programs offer certain benefits for borrowers. These include small down payments and flexible qualification criteria.

4. Fixed-Rate Mortgages

Fixed rate mortgages have interest rates that remain the same throughout the life of the loan.

Pros of Fixed-Rate Mortgages

• Your monthly principal and interest payment will never go up.
• Consistency in your mortgage payment makes budgeting easier.
• You won’t have to worry about rising interest rates because your rate will never change.
• If interest rates ever go down significantly, you could be eligible to refinance.

Cons of Fixed-Rate Mortgages

• If interest rates fall, fixed-rate mortgage borrowers have to refinance to take advantage of that, plus pay borrowing fees and costs all over again. It could cost more in interest over the life of the loan if you secure the loan at a higher rate and you don’t refinance if rates drop.

Who Should Get a Fixed-Rate Mortgage?

A 15-year fixed-rate mortgage is ideal for borrowers who have the cash flow and want to pay off their home faster at less interest.

5. Adjustable Rate Mortgage

An adjustable-rate mortgage is a home loan with an interest rate that adjusts over time based on the market. ARMs typically start with a lower interest rate than fixed-rate mortgages, so an ARM is a great option if your goal is to get the lowest possible rate. 

Pros of Adjustable-Rate Mortgages

• Adjustable-rate mortgages can be the right move for borrowers hoping to enjoy the lowest possible interest rate. Many lenders are willing to provide relatively low rates for the initial period. And you can tap into those savings.
• Although it may feel like a teaser rate, your budget will enjoy the initial low monthly payments. With that, you may be able to put more toward your principal each month.
• Buyers seeking starter homes can also enjoy these benefits because you are planning to upgrade to a larger home when you can. If those plans allow you to sell the original home before the interest rate begins to fluctuate, then the risks of an ARM are relatively minimal.
• The flexibility you can build into your budget with the initial lower monthly payments offered by an ARM gives you the chance to build your savings and work toward other financial goals.

Cons of Adjustable-Rate Mortgages

• Things do not go as planned when it is time to refinance
• ARMs are complex

Who Should Get an Adjustable-Rate Mortgage?

home buyers, particularly those who move often or are buying starter homes, ARMs may make more sense. If you’re not buying your forever home, then buying a house with an ARM and selling it before the fixed-rate period ends can mean a lower mortgage payment.